Nevertheless, we can make a reasonable approximation about the phase(s) to which the U.S. economy may currently be closest. With the trough of the last NBER recession identified as June of 2009, and in light of relatively steady positive GDP growth over the past several quarters, we can reasonably assume that the U.S. economy is currently in a NBER expansion. If so, the current expansion is about 57 months old.
According to NBER data, the average duration of the 11 expansions since 1945 (through the peak of the last expansion in December of 2007) was 58.4 months; the longest was 120 months (between March 1991 and March 2001). So, while it’s not yet possible to identify the midpoint of the current NBER expansion, if it’s anything like the previous eleven, there is a good chance the second half has already begun, or if it hasn’t (and the next recession is more than 57 months away), the midpoint is likely drawing near.
If this inference proves correct, the U.S. economy may be in the midst of (or about to enter into) the two phases of the NBER business cycle during which commodity ETFs could provide the greatest benefit to a portfolio of stocks and bonds. The second half of NBER expansions produced the highest average returns for commodity futures, while the first half of NBER recessions produced positive average returns for commodity futures, during a stage in which average returns for stocks and bonds were both negative.
Broad commodity indices have started 2014 with attractive first quarter gains, and we believe there are compelling reasons, including portfolio diversification, inflation expectations, and past business cycle analyses, for investors to review, and perhaps increase, exposure to commodity ETFs within their asset allocation models.
[1] For the sake of clarity, this article uses the term “ETF” to refer to all exchange-traded products (1940 Act
exchange-traded funds, exchange-traded notes, commodity exchange-traded securities, etc.).
[2] Morningstar Direct.
[3] Gorton, G. and K. Geert Rouwenhorst (2006). “Facts and Fantasies about Commodity Futures.” Financial
Analysts Journal, vol. 62, no. 2: 47-68.
Ryan O. Issakainen, CFA, is senior vice president and ETF strategist at First Trust Advisors LP.
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You should consider a fund's investment objectives, risks, and charges and expenses carefully before investing. You can download a prospectus or summary prospectus by visiting www.ftportfolios.com, or contact First Trust Portfolios L.P. at 1-800-621-1675 to request a prospectus or summary prospectus which contains this and other information about a fund.
The prospectus or summary prospectus should be read carefully before investing. Investors buying or selling ETF shares on the secondary market may incur customary brokerage commissions. Market prices may differ to some degree from the net asset value of the shares. Investors who sell fund shares may receive less than the share’s net asset value. Shares may be sold throughout the day on the exchange through any brokerage account. However, unlike mutual funds, shares may only be redeemed directly from the fund by authorized participants, in very large creation/redemption units. A fund’s shares will change in value, and you could lose money by investing in a fund. One of the principal risks of investing in a fund is market risk. Market risk is the risk that a particular security owned by a fund, fund shares or the market in general may fall in value.
The trading prices of commodities futures fluctuate in response to a variety of factors which will cause a fund’s net asset value and market price to fluctuate in response to these factors. As a result, an investor could lose money over short or long periods of time. In addition, the net asset value of a fund over short-term periods may be more volatile than other investment options because of a fund’s significant use of financial instruments that have a leveraging effect. Futures instruments may be less liquid than other types of investments. The prices of futures instruments may fluctuate quickly and dramatically and may not correlate to price movements in other asset classes.
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